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Exclusive public outlet for documentation and notices from The Original Jurisdiction Republic 1861 circa 2010.

It
is highly probable that the crashing stocks of MBIA, AMBAC and AGO are
the alarm bells of a black swan landing. And, of course, no one has been
talking about them…. until today. Although
these firms are somewhat obscure and small compared to the size of the
majority of financial companies, they are highly leveraged with massive
off-balance-sheet liabilities for which they have zero hope of covering
in the event of even relatively small bond defaults. In other words, these firms are the ones most likely to set off the next financial collapse triggered by their counterparty defaults.

Submitted by PM Fund Manager Dave Kranzler, Investment Research Dynamics:I
really had not been paying much attention to the Puerto Rico debt
situation. After all, $72 billion in debt that might go bad – big
deal. The Fed can print up $72 billion in credit lines with the push of
a button.But a friend of mine happened to mention to me today (Monday) that MBIA’s stock was down over 23% and Assured Guaranty’s stock was down over 13%. That woke me up.MBI
guarantees $4.5 billion in par amount of Puerto Rico muni paper. As of
it’s latest 10-Q (March 31, 2015), MBI showed a book value of $3.9
billion. Puerto Rico alone could more than wipe out MBI’s net worth.
But that’s only a portion of the story. The bigger part of the story is
buried off-balance sheet in the footnotes in opaque financial
structures called Variable Interest Entities (VIE’s). Remember those
from 2008? I remember them vividly.The
VIEs are the off-balance sheet vehicles that triggered the massive
chain of counterparty defaults which de facto collapsed the U.S.
financial system in 2008. The VIEs are where the credit default swaps
and other nebulous forms of OTC derivatives bet slither around.Companies
like MBI and AMBAC underwrite credit “enhancement” guarantees on
these massive cesspools of debt – and the associated derivatives that
are “wrapped around” the debt structures – and stick them in VIEs.
MBI’s 10-K has several pages of footnotes which vaguely describe the
contents of its VIEs. The problem is that MBI and its ilk are
thinly capitalized relative to the potential size of the liabilities
they face if the credit markets become volatile to the downside.Toxicity
plus toxicity does not equal purification. But VIEs that contain
off-balance sheet debt and derivative guaranteed equals toxicity cubed,
at least. In other words, whatever MBI lists as its “net” credit
exposure in its financials, take that number and, at the very least,
triple it.But
wait, the story gets even better. As it turns out Warburg Pincus, one
of the loftiest private equity firms on Wall Street, is by far MBI’s
largest shareholder. Warburg announced a little over five weeks ago
that it was going to unload 60% of its stake via over the counter
negotiated sales – LINK. The firm has been unloading these shares since May 18th. We won’t know how successful this effort has been until the selling is completed.Does
Warburg Pincus sound recently familiar? It’s the firm that hired
“Turbo Tax” Tim Geithner shortly after he left his post as Treasury
Secretary. Remember, Geithner was head of the NY Fed at the time of
the 2008 financial collapse. In other words, he knows where a lot of
the bodies in the financial system are buried. I have no doubt that Geithner has played a significant role in advising Warburg on the need to unload its exposure to MBIA. Anyone who takes the other side of this trade is a complete idiot.But
this story isn’t just about MBI. It’s about the companies that, along
with MBIA, provide “insurance” for bonds and derivatives. These firms
have assumed potential liabilities that dwarf their ability to cover
them. Not just in the worst case scenario. I believe Puerto Rico’s
financial demise could trigger the dreaded financial nuclear daisy chain
of counterparty defaults.The
problem with creating “actuarial” payout models for insurance
guarantees on financial assets, and this especially true for
derivatives, is that the outcome is pretty much binomial. Either the
assets pay off or they become worthless or near worthless.
Furthermore, with the extreme degree of Central Bank intervention, which
has enabled literal financial zombies to continue living and has
enveloped the entire financial system with opacity, it’s impossible to
model in expectations on, and potential sources of, counterparty default
risk. It’s like lightening. It can unexpectedly strike anywhere –
just ask Hank Paulson and Goldman Sachs…This
is exactly what occurred in 2008. Only this time around the problem is
significantly greater than it was in 2008. Global debt and gross
derivatives outstanding are much bigger than in 2008. And, except for
the Plan B hyperinflation of the money supply, Central Banks are out of
bullets.I
believe it is highly probable that the crashing stocks of MBIA, AMBAC
and AGO are the alarm bells of a black swan landing. And, of course, no
one has been talking about them until today. Although these firms are
somewhat obscure and small compared to the size of the majority of
financial companies, they are highly leveraged with massive
off-balance-sheet liabilities for which they have zero hope of covering
in the event of even relatively small bond defaults. In other words,
these firms are the ones most likely to set off the next financial
collapse triggered by their counter-party defaults.

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